Chapter – 8

CONTROLLING
Meaning
Controlling is the process through which management ensures that the actual performance
conforms to the planned performance. It discovers deviation from the results expected. It also
identifies the reasons for d3eviations and suggests suitable action to avoid their recurrence in
future.

Importance / Advantages of Controlling

1. Accomplishing organizational goals – It measures actual performance with standards

and making corrective actions on deviations, so that the organization can achieve its goals
smoothly.
2. Judging accuracy of standards – Controlling helps to check the accuracy of standards in
changing environment, which helps to revise the standards if needed.
3. Efficient use of resources – Controlling seeks to reduce wastages of resources.
4. Improving employee motivation – Controlling ensures employee awareness regarding
what is expected to do and what is the standards fixed on him, so that he will be motivated
to give better performance.
5. Ensures order and discipline – Controlling ensures an order and discipline as there is a
close watch on the activities of all employees.
6. Coordination – In order to coordinate the activities of different persons and departments,
an effective system of control is necessary.
7. Decision making – The process of control is complete when corrective actions are taken.
It will lead to make better decisions in future

Limitations of Controlling

1. Difficulty in setting standards – Controlling will be effective only when standards are
fixed in quantitative terms. But employee morale, job satisfaction, customer response etc.
cannot be expressed quantitatively, so that controlling becomes less effective.
2. Little control on external factors – External factors such as Government policy,
technological changes, competition etc. cannot be controlled by the organization.
3. Resistance from employees – Employees may oppose the control measures taken by
the firm, because they may feel that it will reduce their freedom. E.g., CCTV.
4. Costly affair – Small organizations cannot afford to install an effective control system as it
is very costly.

Relationship between Planning and Controlling – The entire planning process will turn to be
waste unless adequate control measures are exercised. The relationship between planning and
control may be summed up as follows:

a. Planning and control are interdependent and inseparable functions of management.

Without a plan there is nothing to control. Thus planning is useless without control and
controlling is useless without plan.
b. Planning and controlling are interrelated and in fact reinforce each other in the sense that:
• Planning makes controlling easier and effective.
• Controlling reveals the shortcomings of plans and calls for improvement in future.
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 c. Planning is looking ahead while controlling is looking back – Planning is a forward looking
function as plans are prepared for future period. Whereas, controlling is a post-mortem of
past activities to find out the deviations, so that it is a backward looking function of
management.

However, some people argues that, controlling is a also a forward looking function as it
provides valuable information of past experience for future planning.

Controlling Process (Steps in Controlling)

1. Setting Standards

2. Measurement of Actual Performance

3. Comparison of Actual Performance

4. Analyzing Deviations

5. Taking Corrective Actions

1. Setting performance Standards – In order to achieve the goals, standards of

performance have to be determined in planning itself.

Quantitative Standards - As far as possible, standards must be in concrete and tangible

forms which will make evaluation process easy. For example, the profit expected from a
particular product, time required for completing a task, cost of production for one unit is
Rs.100 etc.

Qualitative Standards - Standards can also be in intangible forms. The results expected
from a training programme, loyalties of workers, Improving motivation level of employees,
etc. are the examples for qualitative standards.

2. Measurement of actual performance – The second step is to measure actual

performance of employees or departments. It should measure actual performance of each
activity in terms of quality and quantity.
3. Comparison of actual performance with standards – Comparison of actual
performance with the standards reveals the deviations between actual and desired results.
4. Analyzing deviations – At this stage, the extent of deviations and causes of such
deviations are to be found out. It is important to ascertain whether deviations are within
the expected range. Deviations in key areas of business require urgent attention.
Managers can rely on the following in this regard.
a. Critical Point Control – The control measures should be focused on key result areas
(KRAs) which are critical in the success of an organization. These KRAs are the Critical
Points, if anything goes wrong at this critical point, the entire organization will suffer.
Example: 5% increase in labour cost is a serious matter than 20% increase in postal
charges.

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 b. Management by Exception (MBE) / Control by Exception - All deviations need not
be brought to the attention of top management. Only those deviations which seem
exceptionally high and which cannot be easily solved by lower level management alone
should be reported to top management. Example: 2% increase in the material cost (if it
is within the permissible limit) need not be reported, whereas, if it is far beyond the limit,
say 10% increase, it requires immediate attention of management on a priority basis.
In other words, the top level management is concerned with highly exceptional matters
only and the routine matters will be handled by the lower levels.
5. Taking corrective actions – As soon as deviations are reported, it is the duty of the
executives to take steps to correct the past action so that deviations may not occur again
and the plans are properly executed. If there is no deviation or if the deviation is within the
permissible limit, let the situation remains as it is.

At times, the deviations may be such that which cannot be rectified and beyond the control
of management, they may take necessary decisions by modifying the goals and standards.

Some examples for corrective action:

Cause of deviation Corrective action to be taken
Defective material Change the supplier or quality
Defective machinery Repair or replace
Obsolete machinery Undertake technological up gradation
Increase in lobour turnover Improve working conditions and provide better incentives
Defective process Modify the existing process

Techniques of managerial control

A. Traditional Techniques

1. Personal observation – Personal observation on the employee may create a

psychological pressure to perform well.

2. Statistical reports – Statistical information regarding performance of employees in the

form of charts, graphs, tables etc. enable the managers to interpret them and to make
comparison.

3. Break-even analysis - The

level of operation where
total revenue or sales are
equal to total cost is called
the break-even point. At
this point (sales volume) the
firm makes no profit or no
loss.

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 4. Budgetary control – It is a technique of controlling the activities of an organization with
the help of budgets. It involves the comparison of actual performance with the budgetary
standards. In case of deviations the firm can take necessary corrective actions. E.g.
Sales budget, production budget, Materials budget (raw material utilization), Purchase
budget, cash budget (estimated receipts and payments), capital budget, research and
development budget etc.

Advantages of budgetary control

1. Budget is guidance for management in planning and policy formulation.

2. Gives a direction to the organisation by fixing the goals and targets.
3. Minimises wastages and losses.
4. Actual performance can be compared with budgetary standards.
5. It motivates the executives to attain targets.

B. Modern Techniques

1. Return on Investment (ROI) – This technique is used to ensure the capital investment is
properly utilised or not in order to get a reasonable amount of return (profit).

2. Ratio Analysis – This is a simple technique used for analysing and interpreting data
contained in financial statements. This is done through calculating accounting ratios. A ratio
is an arithmetic relationship between two figures. Most commonly used accounting ratios are
as follows:
a. Liquidity ratio – it is used to ascertain short term solvency of business. It shows the
ability of a business to meet its short-term obligations in time. Current ratio, liquid ratio etc.
are the examples.
b. Solvency ratio – Solvency here means long term solvency which refers to the ability to
meet all liabilities in the event of liquidation. Debt – equity ratio, capital gearing ratio,
proprietary ratio etc.
c. Profitability ratio – It is calculated to know the profitability in relation to sales or capital in
the business. E.g. Gross profit ratio, Net profit ratio, Return on total sales ratio, Return on
capital employed ratio, Return on equity capital ratio etc.
d. Turnover ratio – It reflects the speed at which resources are utilised in effecting sales. A
higher turnover ratio means efficient use of resources. E.g. Inventory turnover ratio,
Debtors’ turnover ratio, Creditors’ turnover ratio, working capital turnover ratio etc.
3. Responsibility accounting – It is a system of accounting in which different sections or
departments in an organisation are taken as “Responsibility Centres”. The person in charge of
a centre is responsible for achieving the target fixed. Responsibility centres are of the
following types:
a. Cost centre – It is a location, a person, a department or an item of equipment for which
the cost is ascertained and used for cost control. For example, in a manufacturing unit
production department is treated as a cost centre and the production manager is
responsible for controlling costs in his department.
b. Revenue centre – A segment of an organization which is primarily responsible for earning
revenue is called a revenue centre. E.g. Marketing department is a revenue centre.

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 c. Profit centre – It is a segment of activity of an organization which is responsible for
making profit. In other words, it is a centre responsible for both revenue and costs and
thereby profit for a particular activity. Repair and maintenance department may be treated
as a profit centre provided it bills other departments for their services.
d. Investment centre – Here the investment is separately calculated and return on
investment is taken as the basis for evaluating the performance of that centre.
4. Management Audit - It is necessary to evaluate the efficiency of management to ascertain
whether the performance of management is according to expected lines. Management audit
reveals the achievements of management against the expected performance and also the
weaknesses are pointed out.
5. PERT and CPM – Program
Evaluation and Review 1
Technique (PERT) was
developed in the US Navy. The
Critical Path Method (CPM) was
developed by J.E. Kelly of 2
Remington Rand and M. R.
Walker of Dupont. It is a network 3
analysis technique which is used
to determine the time it will take
to complete a complex process.
Both are used for planning,
scheduling, implementing and controlling time bound projects which involve various
complexes, diverse and interrelated activities. These techniques are extensively used in the
areas like ship building, construction projects like dams, tunnels, highways, power plants,
aircraft manufacture etc.
Steps in PERT and CPM
a. The project is divided into a number of activities.
b. Develop the network diagram incorporating activities involved with a starting point and
finishing point.
c. Three time estimates – optimistic, most likely and pessimistic – are made.
d. The longest path in the network is identified as critical path.
e. Plan may be modified for prompt execution and timely completion of the project.
6. Management Information System (MIS) – It is a computer based information system which
provides information and supports the management for taking effective decisions. MIS also
serves the purpose of control technique. Since the data and information are provided at the
right time, managers can take appropriate corrective action in case of deviation from the
standards fixed.
Advantages of MIS
a. Collection, processing, and dissemination of information at different levels of management
is facilitated.
b. Planning, decision making and controlling at all levels in the organisation are supported.
c. Quality of information which is vital for managers is improved.
d. Cost effectiveness is ensured.
e. By providing only the relevant information at the appropriate time, manager is not
overloaded with too many information.
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